Home' API Magazine : January 2014 Contents Buying a negatively
geared property in a SMSF
lose $2400 ($10,000 x (39%-15%)) in your tax refund. As you
can see, it isn’t nearly that bad; it’s only $1412 because the
money you contribute to the SMSF to support the property
reduces your personal taxable income.
In the example set, the extra $1412 loss of refund is a
bargain for better asset protection: a 15 per cent tax rate
when the property becomes positively geared and only a 10
per cent tax rate on the capital gain.
Even better, when you reach retirement the tax rate could
be zero for both the net rental income and the capital gain.
And even better still, you only pay 15 per cent tax on
any extra contributions you choose to make to reduce
the principal on your loan, providing you stay under the
Sure, this contribution will be taxed at 15 per cent but if the
property was owned outside of superannuation you’d have to
pay your marginal tax rate of 39 per cent on the money before
you could pay it off the loan.
Making the principal payment through salary sacrificing
into a SMSF moves the non tax deductible dollars spent on
principal repayments from the 39 per cent tax bracket into the
15 per cent bracket.
Also, consider that building depreciation has to be added
back, increasing your capital gains tax when you sell. The
capital gains tax rate of the SMSF is most likely to be less
than your personal one.
¿ HOW ARE SMSFS TAXED?
Now, if you’re still with me, I’ll explain how the SMSF is taxed
and how I came up with the amount of $4118 ($2512 after tax)
that you need to contribute to the SMSF to cover the $5000
cash flow shortfall on the investment.
Warning, strong use of numbers!
The $4118 won’t be taxed in the hands of the SMSF
because it has the rental property losses to offset against
the contribution. The words ‘contributions tax’ are very
misleading. Superannuation contributions that have been
claimed as a tax deduction by either you or your employer are
taxable income to the fund.
Tax is only paid on the net taxable profit of the fund, not on
the amount of the contribution, so if your fund has sufficient
losses, tax won’t be deducted from your contributions.
In this example the fund will have $10,000 in rental property
losses, so not only will it not have to pay tax on your $4118
contribution, but it will be able to use the remaining $5882 in
losses to offset any tax on your employer contributions, saving
another $882 in tax ($5882 x 15%).
The tax saving and your contribution combine to cover the
$5000 cashflow shortfall of the property.
There’s a school of thought that you’re better off owning
a negatively geared rental property in your own name as
opposed to in your self-managed superannuation fund
(SMSF) because you’re in a higher tax bracket, so the loss on
the property will generate a bigger refund cheque.
This might sound logical in theory but the issue is far more
complex than this and my task now is to explain it simply.
¿ HERE GOES...
Consider that you have a rental property that’s making a loss
for tax purposes of $10,000 and $5000 of that is depreciation.
Depreciation doesn’t affect
cash flow so the property
only has a $5000 cash flow
shortfall before taking the
tax refund into account.
Now if your taxable income
is between $37,000 and
$180,000, your tax rate is
between 34.5 per cent and
39 per cent including the
Medicare levy. There’s not
much difference until your
income exceeds $180,000
when the tax rate becomes
47 per cent.
For the sake of this example I’ll use 39 per cent. Accordingly,
the $10,000 tax loss will generate a $3900 tax refund, leaving
you only $1100 out of pocket after tax. Now $1100 after tax
when you’re in the 39 per cent tax bracket is $1803 before tax.
Superannuation funds on the other hand only have a tax
rate of 15 per cent, but if you buy the property in a SMSF you
wouldn’t expect the fund to meet the cash flow shortfall for
the property, depleting the fund’s reserves or utilising your
To hold the property in your SMSF and not utilise other cash
flows into the fund you’d need to contribute $4118 of your
‘before tax’ pay as a salary sacrifice if you’re an employee,
or as a tax deductible contribution if you’re self-employed,
which is $2512 after tax (i.e. out of your take home pay).
So in the example it will cost you an extra $1412 a year after
tax to hold the property in your SMSF rather than in your
This figure will vary depending on how much depreciation is
available. The higher the depreciation the less favourable the
numbers are towards a SMSF.
The claim that you’re missing out on the difference between
your personal tax rate of 39 per cent and the SMSF tax rate
of 15 per cent is suggesting that in the above example you’d
API JANUARY 2014
JANUARY 2014 API
Rates and insurance
Loss for tax purposes
TAX // JULIA HARTMAN
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